A Life-Cycle Model with Ambiguous Survival Beliefs

SAFE Working Paper No. 73

60 Pages Posted: 29 Oct 2014 Last revised: 13 Oct 2015

See all articles by Max Groneck

Max Groneck

Stockholm School of Economics, Department of Economics

Alexander Ludwig

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA); Goethe University Frankfurt

Alexander Zimper

University of Pretoria; Kiel Institute for the World Economy

Multiple version iconThere are 2 versions of this paper

Date Written: October 2, 2015

Abstract

Based on a cognitive notion of neo-additive capacities reflecting likelihood insensitivity with respect to survival chances, we construct a Choquet Bayesian learning model over the life-cycle that generates a motivational notion of neo-additive survival beliefs expressing ambiguity attitudes. We embed these neo-additive survival beliefs as decision weights in a Choquet expected utility life-cycle consumption model and calibrate it with data on subjective survival beliefs from the Health and Retirement Study. Our quantitative analysis shows that agents with calibrated neo-additive survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival chances. Our neo-additive life-cycle model can therefore simultaneously accommodate three important empirical findings on household saving behavior.

Keywords: Bayesian learning, likelihood insensitivity, ambiguity, Choquet expected utility, dynamic inconsistency, life-cycle hypothesis, saving puzzles

JEL Classification: D91, D83, E21

Suggested Citation

Groneck, Max and Ludwig, Alexander and Zimper, Alexander, A Life-Cycle Model with Ambiguous Survival Beliefs (October 2, 2015). SAFE Working Paper No. 73, Available at SSRN: https://ssrn.com/abstract=2515703 or http://dx.doi.org/10.2139/ssrn.2515703

Max Groneck

Stockholm School of Economics, Department of Economics ( email )

Germany

HOME PAGE: http://https://www.hhs.se/en/Research/Departments/DE/

Alexander Ludwig (Contact Author)

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Alexander Zimper

University of Pretoria ( email )

South Africa

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

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